Capitulation!

“Leverage Thrills, But Kills”- Author

In what could be termed a mind-blowing week, Monday saw an explosion in the Stock Volatility Index (VIX), which led to fear and panic gripping Wall Street.

Chart: Twitter

As the VIX crossed 65, some market participants, in what could be called an outrageous call, began demanding an immediate “rate cut” from the Fed!

Nonetheless, as the week ended, the VIX settled below 25, as fears receded after the BOJ’s Uchida statement calmed the markets.

“Won’t raise rate when the market is unstable”- Uchida.

The episode early this week, when Japanese equity markets tanked more than 15% in just 48 hours, indicates that the mega equity rally fueled by AI enthusiasm was built on extreme leverage. Furthermore, the trillions of dollars in carry trades put fuel to the fire.

As a result, the BOJ's hawkish stance resulted in a lightning rally in JPY (more than 10%) in a few days and led to a mega unwind across the global financial system.

As the event passed, the million-dollar question remains whether the carry trade reversal is over. Will equity markets soon be back to normal with a new high? Where does the macro lead us? What did the earnings say about the health of the US economy?

Today, we will examine some intriguing macro data from Japan and the rest of the world and explore the health of US consumers in detail.

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US!

ISM Services was released on Monday amid chaos in the global financial markets.

While the headline number came above 50, indicating expansion, our focus was on the employment report since the labour market has been an area of concern for the Fed and market participants.

Interestingly, ISM Services employment bucked the trend and came in above 50, rebounding from below 50 levels last month.

Again, we would like to point out that it has been a highly volatile series, and one needs to await the trend (before reaching any conclusions), which will likely be visible in the coming months.

We believe ISM Services Employment will follow ISM Manufacturing Employment, albeit with a slight lag, as the labour market has been cooling rapidly beneath the surface.

One of the data points we incorporated into our macro framework came out earlier this week. It was largely ignored due to the chaos in the equity and FX Markets.

The Senior Loan Officer Opinion Survey (SLOOS) is a quarterly survey conducted by the Fed. It records changes in the standards and terms of banks' lending and the state of business and household loan demand.

Since the labour market remains our prime focus, we first looked at the consumer loans in the SLOOS.

Ironically, banks have shown an increased willingness to make consumer installment loans, contrary to what most market participants expected.

In fact, this kind of response usually occurs when we are coming out of an economic slowdown or a recession.

Thus, we pondered for hours and finally got an answer for the above increase: